The administration is engaging in a giant game of chicken—and there's no reason to believe the other side will blink first.

July 9, 2018

It is not normal to see “race against time” and “ship laden with soybeans” in the same sentence, but last week a cargo ship carrying soybeans to China found itself in the trade equivalent of Smokey and the Bandit. Hoping to beat a 25 percent tariff that China was about to levy on U.S. soybeans, the Peak Pegasus dashed across the Pacific. But it ultimately fell short of its goal, Bloomberg reported on Friday morning, arriving in China hours after the new tariffs went into effect.

The voyage of the Peak Pegasus lent an absurd but fitting tinge to the beginning of what could be a very serious trade war between the United States and China. After initiating $34 billion in tariffs on Friday, the Trump administration is poised to impose an additional $16 billion in two weeks. All in all, President Trump has threatened to levy up to $500 billion if China doesn’t change its behavior toward American companies.

But beyond that demand, it’s unclear what this trade war is meant to accomplish—or what the Trump administration would ask for if China and the United States were to agree to come to the negotiating table. Instead, the administration has entered into a high-stakes gambit with neither a strategy nor an off-ramp in sight for either nation, which has turned the standoff into a microcosm of the administration’s blunt, simplistic approach to policy. In this case, it’s one that could easily backfire.

In August of 2017, the Trump administration announced it was launching an investigation into China’s treatment of U.S. companies. This investigation found what has been widely known for some time: that China not only forces a number of foreign companies to partner with Chinese companies in order to do business in the country, but also requires those foreign companies to hand over intellectual property, including proprietary information, to the Chinese companies.

Operating in China is thus a double-edged sword. Because of its size, it is a crucial market for many large companies, but gaining access to that market often requires them to yield their most valuable intellectual property and trade secrets. This has been a longstanding problem for U.S. leaders of both parties.

Most recently, Barack Obama pushed the Chinese government on these issues and its manipulation of its currency. “The key with China is to continue to simply press them on those areas where trade is imbalanced, whether it’s on their currency practices, whether it’s on IP (intellectual property) protection, whether it’s on their state-owned enterprises,” he said ahead of trade talks in late 2014. In 2015, the Obama administration and the Chinese agreed to not steal trade secrets for the benefit of domestic companies. While the Trump administration has jettisoned a number of Obama-era deals, it has stuck with this agreement.

What’s most notable about the Trump administration’s tariffs is its decision to go it alone and bypass other potential avenues, like the World Trade Organization. While the administration did file a complaint against China in mid-March, the taxes it placed on Chinese goods violate the rules of the WTO, which was created, in part, to prevent costly and unnecessary trade wars like the one that is currently brewing. The United States, moreover, has done very well in WTO disputes, winning its cases over 80 percent of the time. While it seems unlikely that WTO arbitration would suddenly cause China to start playing by the rules, there’s no reason to believe that a trade war will be any more successful.

The administration’s decision to ignore the WTO, which it has spent the past months undercutting, follows a long pattern of unilateral action, from the administration’s decision to bomb Syria in April of 2018 to the president’s decision to “rip up” the Iran nuclear deal to his recent spat with European leaders Angela Merkel and Emmanuel Macron.

It also follows another pattern, that of Trump placing an extreme and unearned level of confidence in his own power as a negotiator—which was present in both the administration’s failed push to repeal Obamacare and, more recently, its denuclearization talks with North Korea. In this instance, Trump seems to believe that fear of economic retaliation will be enough to get the Chinese to come crawling to the negotiating table, where he will have all the leverage. But that’s the sum total of the strategy: There seems to be no plan besides the unwavering belief that escalating economic pressure will eventually break the Chinese.

The problem is that the Chinese economy is large enough to withstand the pressure. Furthermore, its leaders are less encumbered by particular constituents who may be harmed by a trade tit-for-tat, whereas Trump is already being subjected to criticisms from industry and voters. For now, both the U.S. and China are convinced that the other will blink as soon as the political and economic costs are felt.

Trump’s recent work as a negotiator indicates where this dispute might be heading. Over the course of the last 18 months, he has often ratcheted up political and economic pressure before accepting a symbolic resolution, such as in his dealings with North Korea. This is a volatile, risky strategy, but the impulse towards face-saving is reassuring. It’s possible that some arrangement could be reached wherein China agrees to stop harming U.S. companies and, in exchange, the administration lifts its tariffs on Chinese goods, before relations revert back to the status quo. Given that Chinese actions are hurting U.S. companies, this is not a very good outcome for the United States, but it’s still better than a harmful, protracted trade war.

For now, none of this is a very big deal—unless you’re a soybean farmer or a lobsterman, two American constituencies that have been hit hard. Combined, the economies of the United States and China are over $30 trillion. In the big picture, $34 billion in new tariffs is not very large at all. It will still be months until this trade war is felt by consumers, although the political impact in agricultural states—many of which voted for Donald Trump in 2016—may be felt sooner. What’s worrying is that Trump is willing to gamble with people’s livelihoods to play what amounts to a big game of chicken, which means an escalation may be inevitable.